Eurobonds - Fit for purpose in today’s evolving capital markets?

The ICMSA (International Capital Market Services Association) has commissioned (through a third-party consultancy firm, Rockview) a whitepaper (icma.org) that focuses on the key features associated with the issuance of Eurobonds through the ICSDs.

With a total outstanding issuance amount in excess of EUR 13.2 trillion, the Eurobond model continues to be positioned as the preferred borrowing vehicle for over 12,000 issuers based in 130 countries, supporting 55 governing laws and accounting for over 350,000 active securities.

What is it about the Eurobond funding model that facilitated its evolution to being one of the best-known securities markets in the world over the last +60 years? Why has it continued to evolve into a funding vehicle that regularly outpaces domestic fixed-income markets?

The answer to these questions can be attributed to a wide range of characteristics that make the Eurobond model unique and attractive to both issuers and investors alike.

The year 1963 was the initial milestone in the history of Eurobonds, through an issuance by the Italian company Autostrade per l’Italia. The transaction was for a modest USD 15 million (by today’s standards), but this inaugural transaction opened the door to borrowers around the world, providing them with the ability to finance outside their home market and local currency – the initial scope of the Eurobond model began. The success of this inaugural transaction spurred companies and governments worldwide to explore leveraging Eurobonds to meet their own funding needs. Today, we have issuers literally from across the globe (a truly global offering), who are able to borrow in the capital markets through the issuance of a Eurobond – offering them borrowing options across 100 different currencies (across both full settlement and denomination currencies). This is further complemented by the collateral lending and borrowing programmes available for Eurobonds through the ICSDs.

Accelerated globalisation (that continues today) drove increasing numbers of companies and governments to recognise the benefits of actively tapping into the international capital markets through the issuance of Eurobonds. The two ICSDs were originally setup to manage the clearing and settlement of Eurobonds – as there was no supporting market infrastructure at the time to support this asset class.

Market evolutions, developing user demands, changing industry dynamics and capital market globalisation have all contributed to the success of the Eurobond model’s expansion from typical conventional bonds and money market instruments, to supporting many innovative funding products from convertible/reverse bonds, equity linked and risk linked bonds to the ESG and digital bonds we see being utilised in the capital markets today.

One of the key characteristics of the Eurobond model is the group of corporate trust banks who provide security services to both issuers and their arrangers. Yet the Eurobond ecosystem expands beyond this to also include the various agents employed by issuers, legal professionals and a wide range of investors and their intermediaries.

Today’s Eurobond market brings unparalleled, deep liquidity to both issuers and investors and is supported by a truly unique, globally connected ecosystem.  Annual new issuance activity ranges between 350,000 and 550,000 unique securities and we have seen the Eurobond market volumes grow at a rate exceeding 5% annually, with the number of securities increasing by circa 9% since 2018; thus, further illustrating the key role Eurobonds have in the global capital markets of today.

So, how would one summarise the benefits Eurobonds bring to issuers, investors and the global capital markets overall? These can be summarised as follows:

• Access to international capital and a broad investor base simplifies access to funding pools outside the confines of issuers’ domestic markets.
• Diversification of funding sources reduces reliance on domestic investors and banks.
• The extensive currency options available favour multinationals with global operations, supranational agencies funding projects worldwide and all institutions engaging in currency swap operations.

• A flexible channel enabling investors to diversify their portfolios internationally and customise their exposure to specific domestic markets and currencies, while reducing overall custody costs.
• A highly liquid financing platform, secured by a deep secondary market in Eurobonds and a broad investor base across the globe.

• The Eurobond market accommodates a broad range of legal regimes and a vast array of products, from plain vanilla instruments through to the most complex derivative and asset-backed structures.
• The combined services offered by ICSDs, Common Depositories/Common Service Providers, coupled with Issuing and Paying Agent (IPA) services ensure high-quality, end-to-end follow-through from security issuance to maturity.
• Eurobonds are a reliable, safe, trustworthy and efficient instrument that is exceptional in its ability to enable issuers to access capital across European and international markets. Highly adaptable by nature, they can easily incorporate new asset classes, products and services. 

…and what lies ahead (challenges and opportunities) for the Eurobond market?

To meet its continued success as a globally utilised funding vehicle in the changing environment of today’s global capital markets, the Eurobond model will need to continue to evolve, as it has been doing for the past 60+ years. The ‘Eurobond modernisation’ process will be facilitated through continued automation and digitalisation, enhancing the user experience and by adding even more efficiency to the issuance process.

The next generation Eurobond model will look to implement more standardised data models and evolve even further towards the use of dedicated APIs for the set-up and maintenance of static data around both the issuance process and post-issuance asset-servicing.

Technological developments will play a key role in the next phases of the Eurobond model.  Distributed Ledger Technology presents opportunities for the Eurobond ecosystem to streamline, automate and simplify processes even further through golden source data, dematerialisation and smart contracts.

Lastly, the Capital Markets Union (CMU), which has been in discussion for many years now, has not yet met its objective of creating deep, liquid European capital markets. Yet the European vision requires significant increases in funding, at least for the next 5-6 years, and this needs a model that can support these borrowing needs. Eurobonds and the associated Eurobond model offer a single European market for debt issuance today and, therefore, is uniquely positioned to contribute to meeting the CMU objectives today and in the future.

The Eurobond market will keep evolving and therefore Eurobonds will continue to meet the needs of the global capital markets today and in the future!